The hearings of the Financial Crisis Inquiry Commission (Commission) are turning out to be as fascinating at the Watergate Hearings I watched back in the 1970s. They’re at least as important but a lot more complicated and there’s no central figure like Nixon to focus the story.

FDL’s Cynthia Kouril posted on the Commission’s first panel from Wednesday, which featured the big bank chiefs. That got lots of media coverage, so I hope to extract interesting nuggets from the panels of lesser known experts that the Commission is using to build the record of how the worst financial collapse since the Great Depression came about.

I think this may turn out to be the greatest criminal [conspiracy] looting story ever. But that’s getting ahead of the story.

Instead, just consider one little piece near the end of the testimony of Denise "Denny" Voigt Crawford, Commissioner, Texas Securities Board and President of the North American Securities Administrators Association, Inc. She appeared on the second panel of Day 2 (January 14).

Commissioner Crawford is a state regulator who for 28 years has dealt with securities frauds/crimes at the state level. She came out firing, taking dead aim at the federal government’s regulatory laxity (mostly the Securities and Exchange Commission) over the last 10-15 years. Her testimony is full of anecdotes of how Congresses, Administrations, the SEC and federal judges have systematically limited state fraud investigations, preempted state oversight and kneecapped enforcement efforts.

But as Crawford explains, that wasn’t because the feds wanted to pursue a vigorous federal enforcement regime and avoid conflicting state efforts; rather they meant to hand deregulatory protection to the financial industry. It’s worth reading her entire testimony (30 pages, pdf), which you can download along with other testimony here.

Near the end, Crawford makes a plea to restore the rights of defrauded citizens to directly sue the crooks who bilked them, but as in other areas, that’s a right our current Supreme Court has sought to limit:

Reexamine and Remove Hurdles Facing Private Plaintiffs. Private actions are the principal means of redress for victims of securities fraud, but they also play an indispensable role in deterring fraud and complementing the enforcement efforts of government regulators and prosecutors. Congress and the courts alike have recognized this fact. The Senate Report accompanying the Private Securities Litigation Reform Act of 1995 (PSLRA) described the importance of private rights of action as follows:

The SEC enforcement program and the availability of private rights of action together provide a means for defrauded investors to recover damages and a powerful deterrent against violations of the securities laws. As noted by SEC Chairman Levitt, “private rights of action are not only fundamental to the success of our securities markets, they are an essential complement to the SEC’s own enforcement program.” [citation omitted]16

The problem, of course, is that over the last 15 years, Congressional actions and Supreme Court decisions have restricted the ability of private plaintiffs to seek redress in court for securities fraud. These restrictions have not only reduced the compensation available to those who have been the victims of securities fraud, they have also weakened a powerful deterrent against misconduct in our financial markets.

The Supreme Court has issued decisions that further limit the rights of private plaintiffs in two important ways. The Court has narrowed the class of wrongdoers who can be held liable in court, and at the same time, it has expanded the pleading burdens that plaintiffs must satisfy to survive immediate dismissal of their claims. As Justice Stevens lamented in his dissent in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761, 779 (2008), the Court has been on “a continuing campaign to render the private cause of action under Section 10(b) toothless.”

In short, the pendulum has swung too far in the direction of limiting private rights of action. It’s essential to examine whether private plaintiffs with claims for securities fraud have fair access to the courts. In that process, I’d like to see a Congressional review of the PSLRA and passage of the Liability for Aiding and Abetting Securities Violations Act of 2009 to reverse one of the Supreme Court’s most anti-investor decisions in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 114 S.Ct. 1439 (1994). The Court ruled that the private right of action under Section 10(b) of the Securities Exchange Act of 1934 cannot be used to recover damages from those who aid and abet a securities fraud, only those who actually engage in fraudulent acts. The Court’s decision insulates a huge class of wrongdoers from civil liability for their often critical role in support of a securities fraud.

It bears repeating that removing excessive restrictions on access to the courts would not only provide more fair and just compensation for investors, it would also benefit regulators by restoring a powerful deterrent against fraud and abuse: the threat of civil liability.

Our video from C-SPAN captures the Q&A between Commissioner Bob Graham and Ms. Crawford. I’ll be highlighting select pieces from other testimony in future posts.

It’s too early to tell how effective these hearings will be, but I think one of the keys will be how well these "secondary" panels build a record and create a coherent story that will begin to illustrate what a vast criminal enterprise took hold of our economy in the age of non-accountability.

Update: Media coverage of the second day panels:

NYT: A Call for More Regulation at Fiscal Crisis Inquiry

McClatchy: Justice Department eyes possible fraud on Wall Street